A cautionary tale in healthcare reform

Two decades ago, New York passed a law requiring insurers to accept all applicants, even those with preexisting conditions. Now, premiums in the state are the highest in the nation by some estimates.

Reporting from Washington – Spurred by heart-wrenching stories of sick people denied health coverage, the state of New York did what many of President Obama’s critics say he should do now — it passed a relatively simple law requiring insurers to accept all applicants.

Other states have taken similar steps, making narrowly targeted changes instead of trying to overhaul their whole healthcare systems.

But two decades later, New York’s experience offers a cautionary tale: Making isolated changes to the complex medical insurance system can have unwelcome consequences.

Premiums in New York are now the highest in the nation by some measures, with individual health coverage costing about $9,000 a year on average. And nearly one in seven New Yorkers still lacks health coverage, a greater proportion than before the law was passed.

The state has become a victim of a dangerous dynamic in insurance markets. Laws allowing consumers to buy insurance at any time often saddle companies with a lot of high-cost customers.

That in turn drives up premiums, pushing away younger, healthier people who are vital to a functioning insurance system.

“You basically can’t have a functioning insurance market if people can buy insurance on the way to the hospital,” said Mark Hall, a Wake Forest University economist who studied New York’s experience.

‘Case study’

This issue is now at the heart of one of the biggest fights over Obama’s healthcare plan: the so-called mandate requiring Americans to buy insurance — a requirement that many experts believe is crucial to avoid the problems seen in New York and other states.

“We are sort of a case study of what not to do,” said Mark Scherzer, a consumer attorney who helped lead the fight for New York’s changes in the early 1990s and is now counsel to New Yorkers for Accessible Health Coverage.

Other states have either abandoned such reforms or been forced to scale them back.

When then-Gov. Mario Cuomo signed New York’s insurance law in 1992, many advocates believed the state was charting a path toward affordable, accessible healthcare. Cuomo called the legislation a “forerunner of what we’ll [be] seeing nationally.”

The law focused on people who did not get health benefits from their employer, forcing them to shop for insurance on their own in what is called the individual market.

To protect these people, state lawmakers approved the “guaranteed issue” provision, which prohibited insurance companies from denying coverage to customers, even those with preexisting conditions.

Such rules became popular in the early 1990s, as states including New Jersey and Washington contended with insurance companies that were denying coverage to people with preexisting health problems.

New York went further, becoming the first state to also include a “pure community rating” requirement that prohibited insurers from varying premiums based on customers’ age or health, another common industry practice. Three years later, the state required all HMOs to offer a comprehensive, standardized package of benefits.

The law allowed consumers to buy insurance after they became sick with only a relatively short waiting period. They could also drop it when they no longer needed it.

The New York insurance market did not collapse, as some insurers had warned. But in the ensuing years, more older and sicker New Yorkers bought individual health plans. And premiums shot upward.

Since 2001, the average premiums for a health plan on the individual market in New York has nearly tripled, according to the state Insurance Department. In some counties, it is impossible to buy an individual plan for less than $12,000 a year.

Although New York has higher medical costs than many states, its premiums still outpace other high-cost states.

An informal survey by America’s Health Insurance Plans, an industry group, showed that average premiums in New York last year were more than twice those in California and Florida, two other high-cost states.

In New Jersey, which enacted similar insurance rules at the same time as New York, researchers found that the regulations contributed to a 50% decline in enrollment in individual health plans and a two- to threefold increase in premiums.

roll back their new insurance rules in the 1990s after insurance companies abandoned the state market. In Washington, the three largest insurers simply stopped issuing coverage to individuals.

An exception

Today, New York is one of only a few states that have retained both guaranteed issue and pure community rating rules.

That offers New Yorkers who are sick substantially more protections than consumers in less regulated states such as California, Florida and Texas, where people with cancer or other preexisting conditions are routinely denied coverage.

But with premiums continuing to climb, the market regulations are increasingly becoming an empty promise, said Scherzer, the consumer attorney. “You have to be incredibly sick to make it worthwhile,” he said.

Obama and congressional Democrats tried to head off the problem confronting New York by including a requirement in their healthcare legislation that nearly all Americans buy insurance.

This so-called insurance mandate alone would not guarantee lower premiums, many experts concede. Insurance rates in Massachusetts, which included a mandate in its landmark insurance overhaul in 2006, remain relatively high.

But there is broad consensus that a mandate would encourage younger and healthier people to buy insurance, spreading risk more broadly and ultimately helping to restrain the growth of premiums.

New York’s largest insurer, Empire Blue Cross Blue Shield, a division of WellPoint Inc., has calculated that a mandate could bring down premiums 50% to 60%, Empire President Mark Wagar said.

But the mandate has become one of the most controversial elements of congressional Democrats’ healthcare bill, and a reason why the bill is so expensive. Most experts believe that if the government requires everyone to buy insurance, it must provide subsidies for low-income consumers.

Now, Republicans and some Democrats are pushing to remove the mandate.

Before they do, they should look north, said Courtney Burke, who directs the Health Policy Research Center at the Rockefeller Institute of Government in Albany, N.Y.

“They could learn from New York’s experience,” she said. “If you don’t have some kind of incentive for people to participate, you are going to have problems.”

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